Two Alternative Approaches To Fundamental Economic Policy. Which One Works?

The mid-term elections are upon us. Time to recognize once again that there are two alternative approaches to fundamental economic policy, and that one works while the other does not. For most of my life, both political parties opted to advance the approach that does not work. Today, that is much less true.

There can be many details and nuances to economic policy, but here I am talking only about the one big overriding fundamental issue, namely, which is better for economic success and prosperity: higher taxes and bigger government, or lower taxes and smaller government? They are opposites, and they can’t both be right. Today, the Republicans, and President Trump, whatever else you might think about him, are (mostly) advocates for lower taxes and smaller government. The Democrats are universally advocates for higher taxes and bigger government, although not all of them go to the same levels of extremism.

We’ve just been through a big real-world experiment to test the two competing theories. Granted, no real-world experiment is ever perfect, or can control all of the moving pieces one would like to control. Nevertheless, we know that after the sharp 2008 downturn, the federal government adopted the bigger government/increased spending approach as the remedy to the recession. Two “stimulus” spending bills, totaling about $1 trillion in additional government spending, passed the Congress in 2008 and 2009; and then, under President Obama, we had Obamacare, some tax increases, and a regulatory explosion. From that policy mix, we got the slowest recovery since World War II, with total employment continuing to fall through 2010 and not recovering to its 2007 peak until 2015. Economic growth never reached 3% in any year of the Obama presidency. Then President Trump adopted a lower taxes/less regulation approach (although not yet lower government spending). Suddenly economic growth hovers around 4%, the number of jobs is soaring, unemployment is at record lows, and wage growth is booming.

And then we have the perennial examples from around the world. It’s impossible to miss that the most successful countries are the ones with more economic freedom, smaller government, and lower taxes (e.g., U.S., Switzerland, Singapore, Canada, Australia); but countries with bigger government spending and higher taxes have dramatically less success, from Greece and Italy among the developed countries, all the way down to Venezuela and North Korea at the bottom of the economic heap.

So what is a good progressive to do? I’ll skip the latest nonsense from Paul Krugman, and consider for today a column by one Michael Tomasky that appeared in the New York Times on Friday. The headline is “The Democrats’ Next Job: Bury Supply-Side Economics.” The theme here is that “Republican[s] . . . win by spinning a good story about economics. Liberals need to do the same.”

Yes, this debate has nothing to do with what actually works in substance to bring greater prosperity to the people. Rather, it is all about winning the game of “spin.” The critical task for Democrats going forward is “how they can construct a story about how the economy works and grows . . . that competes with — and defeats — the Republicans’ . . . narrative.”

But what about the good old Keynesian blather that has been with us for our whole lives? Tomasky seems to have noticed that the old prescription of increasing government spending to “stimulate” the economy is no longer selling (maybe because the people noticed that the last rounds of gigantic “stimulus” were a total bust):

[Democrats] used to [have such a narrative], once upon a time. It was called Keynesianism, or sometimes demand-side economics (which is why conservatives named their theory supply-side). Keynesianism — in a nutshell, government investment in public goods increase demand and prosperity — held sway from the 1940s through the 1970s, the greatest period of economic growth in history.

Tomasky seems not to know that the boom of the 1940s to at least the 60s was set off by a decline of well over 50% in government spending in the immediate aftermath of World War II (1945-47). The Keynesians have done an excellent job in suppressing that easily-available fact.

Anyway, what’s Tomasky’s proposal for how to win the all-important game of spin?

It seems to me that the Democrats’ story has to be built around the simple idea of investing in middle- and working-class people. Not “spending,” but “investing.” Spending sounds profligate; investing sounds prudent . . . . Giving more money to working people and investing in their needs is how an economy grows. That’s a direct counterargument to supply-side economics. If enough Democrats say it and say it and say it, they can drive a stake through supply-side’s heart.  Once Democrats can make that case, they’ll be able to turn the tables on the supply-siders. 

Or, to put it in simple, non-spun terms, our pitch to the people should be that their best bet for prosperity is “gifts” and handouts and free stuff from the government’s infinite supply of loot.

I won’t express an opinion on whether that is a good narrative to sell Democratic policies to the broader public. The more important question is, does anyone — even Democrats and progressives themselves — really believe that endlessly increasing government spending and handouts is a route to prosperity that will actually work? If so, based on what? Isn’t it obvious that the real game to use government revenues to buy enough votes to support more and more programs and giveaways to provide more and more government sinecures and power for the cadres of the left?